Answered: 1. Why did Toyota establish a regional…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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Case: Toyota’s innovative international multipurpose vehicle (IMV) project Although planning for the IMV project began in 1999, soon after the Asian financial crisis, its genesis
is not solely attributable to this event. Sales of the Hilux pickup truck had been steadily declining in
Japan, Toyota was (and remains) committed to increasing overseas production, and a strategic
decision was taken to design affordable yet high quality pickup trucks and multi-purpose vehicles
(MPVs) for growth markets, mainly in emerging economies including East Asia. This was further
compatible with the overall strategy of increasing Toyota’s global market share of auto production
and sales. The crisis did, however, force a critical re-revaluation of Toyota’s traditional strategy of
local assembly using components, particularly more complex intermediate products such as engines,
from Japan. Toyota’s leitmotif is kaizen and consistent quality and this explains why the company had
been initially reluctant to relocate overseas from Japan the highly efficient production capacity that
had been built up over decades. The challenges associated with replicating the Japanese model
overseas are well documented (Abo, 2007) and are magnified in developing economies, such as those
found in Southeast Asia. Moreover, Toyota’s application of lean manufacturing is dependent on
closely coordinated supplier networks. Yet the collapse of regional economies and the drop in the
value of the Thai Baht in particular, presented an urgent economic rationale to increase localization of
component sourcing. Additionally, the previous model of offloading older models in developing
economies was coming under pressure from competitors, particularly Korean firms. The challenge,
therefore, was twofold; to offer attractive models utilizing the latest technology but still suitable for
developing economies, and to do so while maintaining a competitive price. Toyota’s response to this
is found in the IMV project, the stated aim of which is to ‘realise global optimal production and
supply networks’ (Toyota Annual Report, 2003). IMV vehicles, of which there are five models with three body styles (pickup, SUV and multipurpose
vehicle), share a common platform, which reduces design and production costs and is becoming a
common feature in auto production. This platform is also specifically designed for the sometimes
challenging driving environments found in developing economies. The choice of these models reflects
diverse consumer demand in developing countries. Thailand, for instance is the world’s second largest
market for one-ton pickups while Indonesian consumers prefer the MPV style. The IMV vehicles also
act as entry level models that familiarize consumers in emerging economies with Toyota’s
competitive strengths and, the intention is that these consumers will be favourably disposed towards
Toyota’s mainstay sedans as middle classes expand and consumer tastes become more sophisticated.
A similar line of reasoning can be identified at Honda with regards to power products (generators,
outboard engines, agricultural tools) and motorcycles.
Production is centred on Toyota’s Thai and Indonesian plants but assembly also takes place in
Argentina and South Africa (See Figure 1). Crucially, all production occurs outside Japan and
Localization rates are high, reportedly 97 per cent in Thailand, which means that production does not
have to rely on components sourced, expensively, from Japan. This is where the ASEAN advantages
comes into play as Toyota, along with other Japanese auto makers, have been developing their
supplier networks on a regional basis for the past two decades. It is this historical investment and
development of local suppliers that allows Toyota to realize the advantages of low-cost labour while
maintaining quality. Due to intense scrutiny of the supply chain and high localization rates, cost
savings are reported to be around 30 per cent, allowing Toyota to compete therefore both on cost and
quality. Yet operating in emerging economies can also bring associated risks, particularly with regards
to disruption of the supply chain. To mitigate this, Toyota has built-in some flexibility to the demands of the just-in-time production by requiring plants to maintain a two-week supply of components on
site. The initial production target at the project’s launch in 2002 was for 500,000 units with Thailand
as the key player allocated an annual target of 280,000 units of which 140,000 designated for export
markets. The Thai plant further produces and exports diesel engines. However strong demand
following commencement of the production line in 2004 saw the overall target for the project revised
upwards to 700,000 units. By comparison, Toyota’s total consolidated production in 2006 was
approximately 8 million units.
IMV production is also supported by the presence of Toyota’s regional HQ, Toyota Motor Asia-
Pacific (TMAP), in Singapore (established in 2001), which is 100 per cent owned by TMC. In
contrast to the more straightforward activities of regional management structures in North America
and Europe, Toyota’s organisation in East Asia has emerged from the necessity of dealing with the
complex nature of the regional division of labour and of a need for better coordination of supply
chains and parts complementation under AFTA. Additionally, the establishment of a Global
Production Centre (an advanced, globally integrated training facility) in Thailand in 2003 supports the
development of human resources in the region, further facilitation localization while maintaining
quality. Finally, Toyota established its first R&D centre in an emerging economy, Thailand in 2005
further underlining its commitment to localization of design (See Table 1 for details of production
bases in 2012).
The IMV project this represents an innovative response to competitive global markets and localized
demand. By drawing on an existing regional production network in (ASEAN) and production and
assembly facilities in other emerging economies Toyota is successfully linking spatial scale and
organizational structure. This has been facilitated by localization of production, investing in the
development of regional supply chains, a commitment to local staff, and regional management. Given
surging demand in emerging markets (45 per cent of Toyota’s total sales in 2011) the IMV project can
be regarded as a successful model of global/regional production organization and by March 2012 over
5 million units had been produced under the scheme. Case Study Questions:
1. Why did Toyota establish a regional production network in Southeast Asia? Identify and justify three key drivers. Once you have identified these drivers, consider what managerial and operational challenges a regional production network presents. Identify and justify three
key issues.
2. Critically analyse the aspects that affect firms’ localization decision. Use this case as an example.

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